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Terry’sView: Not All Experts Are Equal

Terry’s View :  Not All Experts Are Equal

There are two defining characteristics among the nation’s “leading” economists: (1) they are hopeless at forecasting residential property markets; and (2) they refuse to learn from their mistakes. In 2023 economists predicted prices to fall, but instead they rose and they dismissed the outcome as an aberration which “surprised everyone”. Then they keep using the same flawed methodology and are predicting price falls in 2024 because of the impact of rising interest rates. A year ago, most economists tipped prices to fall at least 15% because of rising interest rates. Instead there were price rises averaging 8.6% for houses and 6.4% for apartments (CoreLogic figures). Several cities and regional markets had annual price rises above 10%. The key lesson from 2023 is that there are forces more powerful than interest rates impacting property markets. The most important being shortage. There continues to be strong demand in the market at a time of under-supply, destined to get worse in 2024. The theory that rising interest rates means falling prices, is not based on historical evidence. In my four decades of researching and writing about the housing market, I’ve never seen a period when rising rates caused prices to collapse. Some of the nation’s most notable property booms have occurred during times of high and rising interest rates including the late 1980s and last year. But economists are forecasting price weakness in 2024 “as higher interest rates bite”. The RBA started lifting the official interest rate in May 2022 and there have been multiple increases since then. Higher interest rates didn’t “bite” in 2023 but apparently, they will “bite” in 2024. Sadly, that’s all the nation’s high-profile economists have to offer. Their understanding of real estate dynamics is desperately thin, and they will continue to be proven wrong with their forecasts. 

Call To Speed Up Approvals 

The Prime Minister has called on state and local governments to drastically speed up building approvals, to help alleviate the housing crisis. His appeal comes as it was revealed that the pace of new home construction has hit its lowest rate in more than a decade. Concerns are emerging that delays in approvals and construction mean the Government will not hit its target of 1.2 million new homes being built in the next five years. To do that 240,000 homes will need to be built every year – more than has ever been delivered in the past. According to the National Housing Finance and Investment Corporation Australia’s housing shortfall will reach at least 175,000 homes by 2027. The Housing Industry Association says the number of new homes sold is down 18% year on year and the cost of building a home is still rising. It says the average value of a detached home approval in the September quarter was $461,000 which is 11.5% higher than in 2022. According to the Australian Bureau of Statistics, the proportion of privately funded housing development now makes up 98.3% of construction. Although it is expected more social housing will be delivered though the $10 billion Housing Australia Future Fund, which intends to build 30,000 new social and affordable rental homes over five years and a further 10,000 affordable homes under the national housing accord scheme. While demand for housing is high many building companies will still struggle to survive in 2024 with Australian Securities and Investments Commission (ASIC) figures showing 3046 construction-related companies collapsed in the year to December 3, which was 38% higher than the whole of 2022. 

What To Expect in 2024 

Property prices are tipped to keep rising in 2024, although the pace of growth will vary widely from state to state. PropTrack economic research director, Cameron Kusher, says with interest rates climbing a record 425 basis points since May 2022, maximum borrowing capacities have now reduced by more than 30% and mortgage servicing costs have surged. As a result, he expects price growth will be slower in 2024 than in 2023. “In saying that, we are anticipating persistent strong demand for housing, limited new housing construction, and an expectation that total listing volumes will remain low with uncertainty around whether new listing volumes will be as strong as they have been over the second half of 2023,” he says. “These factors will likely lead to further price gains.” 

Senior economist, Eleanor Creagh, says while home price growth will slow, tight rental markets will continue. “With vacancy rates historically low, weekly rents are growing at a fast pace. There is nothing meaningful on the horizon to suggest a sufficient increase in supply of available rentals, which is the release valve we need,” she says. “With continued strong demand to rent, tight rental markets and upward pressure on rental prices are likely to remain in 2024.”

Market Trends In 2024 

Five key trends will drive the Australian property market in 2024, according to Domain chief of research and economics, Dr Nicola Powell. She says a cash (interest) rate cut and population growth will add to demand, affordability will become more important, YIMBYs will replace NIMBYs, and rental markets will finally reach a tipping point. Powell says a rate cut will see more people enter the market as their borrowing capacity improves, that coupled with continuing population growth will push prices higher in 2024. While she believes net overseas migration has peaked Powell says it will continue to influence the property market for some time yet. “Domain analysis found population growth has a cumulative longer-term effect on house prices and, therefore, will continue to play a driving role in our housing markets into 2024 and beyond,” she says. In a search for affordability buyers in 2024 are set to explore sister (or neighbouring) suburbs which they would have previously overlooked. This Powell says allows buyers to still access the amenity in their more desired suburb but not the high buy in price. The continuing housing crisis means attitudes are changing toward suburban development according to Powell. While previously it had been NIMBY “not in my back yard”, now it was YIMBY “yes in my backyard”, she says. After two years of solid rental increases, Powell also believes rental growth will hit a peak in 2024 and slow.

Top Investment Locations

There are still plenty of good options for property investors despite the massive price increases many suburbs have experienced inthe past two years.

A new report by PropTrack surveyed a panel of 17 property experts and came up with a list of 100 suburbs they expect to outperform in 2024. The findings are based on a variety of factors including affordability, location, family appeal and investment and infrastructure projects as well as rental yields. Unit markets were the top performers in every state. 

The top location for the highest rental yields in Australia are both in Western Australia, Armadale and Geraldton both with unit rental yields of 7.7% based on rents of $415 and $260 per week respectively. In Queensland Gladstone units had a top rental yield of 7.4%, Darwin City (7.3%) was the top in the Northern Territory and Whyalla (7.2%) in South Australia. 

Victoria’s top market for yields was Albion (5.6%), the ACT was Dickson (5.3%), Burnie in Tasmania (5.2%) and in New South Wales, Dubbo (5%). 

In good news for investors, the report says the current high interest rate environment will make renting the only affordable option for many people which will push up demand even further for rental properties.